Connecticut is probing First Niagara Financial Group Inc's proposed $1.5 billion takeover of NewAlliance Bancshares Inc and has asked the banks to justify the merger, throwing a potential roadblock to the largest U.S. bank deal in nearly two years.

The state's banking department may only approve bank deals that benefit Connecticut's economy and the public, Attorney General Richard Blumenthal said on Wednesday.

I believe the proposed merger raises significant and far-reaching legal and public policy issues, including its effect on Connecticut jobs, and our economy, as well as community banking, Blumenthal wrote in a letter to the banks.

Blumenthal, who is running for the U.S. Senate, has requested information from the banks -- including potential job losses and branch closures, new products and services that the merged bank would offer Connecticut consumers and plans for providing credit to consumers.

First Niagara said it will respond to Blumenthal's requests. Once he has the chance to familiarize himself with the range of benefits that this proposed transaction holds for consumers, businesses and communities, and once he understands First Niagara's record of performance, he'll clearly see the value of the proposed merger for the state and communities that he serves, spokeswoman Leslie Garrity said in a statement.

NewAlliance, based in New Haven, Connecticut, expects Blumenthal will welcome the deal once he has had the chance to become familiar with First Niagara's track record, spokesman Paul McCraven said.

First Niagara, a New York-based company, announced the deal earlier this month. The combined bank would have more than $29 billion in assets, including $18 billion in deposits.

Blumenthal said he wants to find out whether the deal would help the state's economy or just make First Niagara an attractive target for yet an even larger bank with even less connection and commitment to Connecticut consumers and communities.

First Niagara's shares closed up 2.6 percent at $11.58 on Nasdaq, while NewAlliance shares were up 2.4 percent at $12.53 on the New York Stock Exchange.

(Reporting by Paritosh Bansal; Editing by Gerald E. McCormick and Steve Orlofsky)